By Greg Robb
The Federal Reserve’s new “dot-plot,” to be released in two weeks, could show more than one quarter-point hike in the central bank’s benchmark policy rate in 2022, said San Francisco Fed President Mary Daly on Thursday.
Daly’s comments are another sign that the Fed is pivoting in a hawkish direction given the widespread price pressures reported in the economy.
Already, Fed Chairman Jerome Powell has opened the door for the Fed to accelerate the pace of the tapering of the central bank’s asset purchases by a few months so that they will end in the first quarter. There is broad support at the Fed for an accelerated pace of taper. Fed Governor Randal Quarles and Atlanta Fed President Raphael Bostic both said they will support the earlier end to asset purchases.
Fed officials want to end the asset purchases before they raise interest rates.
In the last “dot-plot” released in September, the Fed penciled in only one rate hike. The dot-plot also indicated three rate hikes in both 2023 and 2024 to push interest rates up to 1.8%.
Pulling rate hikes forward ” is certainly something I would anticipate,” Daly said.
“We could have some of them more in 2022,” Daly said, during a discussion hosted by the Peterson Institute for International Finance.
In his remarks, Quarles said the Fed will have to need to raise rates.
Financial markets have penciled-in three rate hikes: one in June, September and December.
Looking forward, Daly said she had no expectation the Fed would need to raise interest rates above “neutral,” which is estimated to be when interest rates get to 2.5%.
“Neutral” is the level of interest rate where Fed policy is neither stepping on the gas to boost the economy or slamming on the brakes.
With inflation at 30-year highs, the fear of the Fed having to push interest rates above neutral is a concern on the mind of investors.
In the famous period of the late 1970s and early 1980s, Fed policy rates got up nearly to 20%.
“I have no expectation right now that we will need to raise interest rates beyond the neutral rate of interest. I don’t see we would have to really go beyond that in order to rachet-back rising inflation,” Daly said.
The Dow Jones Industrial Average (DOW:DJIA) was up more than 600 points on Thursday as stocks have become more volatile given the shift in the Fed’s tone.
The yield-curve has flattened with the yield on the 10-year Treasury note (XTUP:BX:TMUBMUSD10Y) falling to 1.460% while shorter-dated bond yields (XTUP:BX:TMUBMUSD02Y) have risen.